Interest rates 'likely' to rise in spring 2015


Inflation figures

Interest rates are likely to rise from their historic low of 0.5% in the spring of next year, a Bank of England policy maker has said.

Martin Weale, a member of the Bank's rate-setting Monetary Policy Committee (MPC), appeared to indicate the rate hike is likely to come before the May general election.

It is the clearest indication yet from any of the MPC's nine members about when borrowing costs will start to rise, and comes a week after it abandoned its "forward guidance" policy linking the cost of borrowing to unemployment figures.

Mr Weale told Sky News: "I think it is very helpful if we try and explain that the most likely path for interest rates is that the first rise will come perhaps in the spring of next year. And then the path is likely to be relatively gradual.

"During an election campaign it would obviously be difficult (to change rates) but the election campaign will last for three weeks."

Mr Weale added that a faster than expected pick-up in average earnings over the coming months would mean that an even earlier rise could not be ruled out.

The Bank slashed rates to 0.5% in 2009 in the depths of the recession and they have remained at that level for five years to try to help the recovery gather pace.

But as an upturn in the economy has started to take hold, markets have become increasingly anxious about when rates will eventually start to rise.

Bank governor Mark Carney introduced a new policy of forward guidance shortly after taking over at Threadneedle Street last summer to try to restore much-needed confidence to households and businesses.

It pledged that the MPC would not even begin to consider a rate hike until unemployment had fallen to 7%.

At the time, policy makers did not expect this threshold to be reached until 2016 but since then the rate has fallen more quickly than it anticipated.

Last week, the Bank acknowledged that the target was likely to be hit in the spring of this year and abandoned the link to unemployment after just six months, instead pledging that a more opaque measure of spare capacity in the economy would be used.

Mr Carney said the recovery was "neither balanced nor sustainable" and that rates would have to stay well below pre-recession levels of around 5% for the next few years.

He pledged that rates do go up, the rise will be gradual, but did not try to quash market expectations of a hike in April 2015 and refused to make any pledge that there would be no increase this year.

The latest remarks from Mr Weale helped the pound to steady after falling earlier in the session against the dollar. But the timetable he appears to have outlined does not appear to differ hugely from what the City was already expecting.

Howard Archer, economist at IHS Global Insight, said that after the "fuzzy" new form of guidance introduced last week, communication from the Bank on its thinking would become more important - and the remarks by Mr Weale "don't get much more specific".

Figures this week showing an unexpected rise in unemployment from 7.1% to 7.2% and a fall in inflation to below the Bank's target of 2% had suggested a possible easing in any pressure to raise rates.